The best ways to secure your financial freedom
In order to secure your financial freedom you need financial back-up. If you have a way to pay for any unexpected expense that comes your way, be it a repayment on a vehicle or the ability to pay cash for the excess when the geyser goes, having the money available helps to give you total peace of mind.
As with anything in life you need a plan and for financial security that plan starts with a budget. Because we crave instant gratification, drawing up a budget is something we generally resent. The easiest way to do your budget is to split your income in three, one third to cover all the daily expenses, one third to spend on something you enjoy, i.e. holidays, and the balance towards savings. This way of dealing with your expenses probably only comes easy when you start with your first salary. Otherwise you can make use of goals-based budgeting. Calculate your net salary – this is the gross salary minus tax, medical aid deductions and retirement savings. Use 50% of the net salary for fixed expenses, 30% for variable expenses and 20% for saving towards goals. Make sure the 20% does not sit in your bank account otherwise there is a temptation to use it.
Secondly, you have to have an emergency fund in place. We usually recommend that you keep 3-6 months’ worth of living expenses in this account. This helps you to manage expenses such as car tires, some school event that you didn’t plan on or an insurance excess payment. We all know that these expenses happen from time to time and having the money available ensures that you do not derail your plans for holidays, retirement and the like.
Debt can destroy any plans you have for financial freedom. The only debt that could be seen as “good” debt is where the asset which is bought with debt increases in value over time, for example your home. The other debt people always say you cannot get away from is when you buy a vehicle. But you should not feel the need to replace the vehicle as soon as it is paid off with one of a higher value. Most vehicles can last for much longer than five years without giving you any mechanical problems. Save the amount you would pay on a new vehicle and buy your replacement vehicles with cash. You will save an enormous amount on interest. Store cards, credit cards and personal loans are an absolute no go if you want financial freedom.
Lastly, make your savings work for you. Once your emergency fund is set up, channel your savings to retirement funds, tax free investments and then some discretionary savings. There seem to be a lot of negativity around retirement savings, but this is the only investment that gives you free cash in the form of a tax rebate. Currently you can invest up to 27.5% of you income in a retirement fund and claim all the tax on these payments when you do your tax return. If you are in the maximum tax bracket that gives you 41% of your payments back in your pocket. The best option is to re-invest this money, but it can go towards your holiday or any other big purchase you have in mind.
Other great investment vehicles are tax free investments and unit trusts. Always make sure that your investment is transparent and that you know exactly what it is you invest in and the costs. Make sure that you put money away every month and that it actually beats inflation over time. It always help to get some direction and if you are not sure where to start get in touch with a CERTIFIED FINANCIAL PLANNER®/CFP® professional they might be all you need to put you on the right path of financial security and freedom.
